DGCX's proposed plastics futures contracts to offer efficient hedge against escalating prices

19-May-08
Initiating a new reference point for polymer pricing in the Middle East, Dubai Gold and Commodities Exchange (DGCX) said its proposed plastics futures contracts will offer an efficient hedge against escalating prices, which have increased by 15-20% over the past six months. Details of the proposed Plastics futures contracts were unveiled to investors and the Plastics community at a workshop on 'Price Risk Management and the use of Plastics Futures Contracts', organized by DGCX in collaboration with one of their prominent broker members RBS Sempra Metals (a business of The Royal Bank of Scotland), a leading ring dealer member of the London Metal Exchange. The aim of the workshop was to address the issues faced by the plastics industry in relation to managing price risk volatility and to provide the plastics supply chain with a detailed understanding of how DGCX Plastics futures contracts can facilitate in managing adverse fluctuations in market prices. Speaking on the success of the workshop, Ryan Younger, trader, RBS Sempra Metals said, "We were pleased to note a significant level of interest at the conference in the upcoming launch of the DGCX Plastics Futures contracts. With the ongoing price volatility in the plastics market, Producers, Traders and Converters are looking to protect their margins, and Plastics Futures provide a tool for market participants to do this. We expect the successful launch of the DGCX plastics futures contracts to complement the Middle East's strength in the petrochemicals industry". James Bernard, Associate Director Commodities, Dubai Multi Commodities Centre (DMCC), said that the recent run-up in polymer prices had the potential to adversely impact participants along the plastics supply chain. Price volatility coupled with the need to protect operating margins has led to a strong demand for price risk management tools in the plastics industry. The DGCX plastics futures contracts will address this need, enabling participants to achieve best price discovery through a transparent mechanism. The four plastics futures contracts planned by DGCX include Low Density Polyethylene, High Density Polyethylene, Linear Low Density Polyethylene and Polypropylene. Elaborating on the benefits of the contract, Bernard said, "Spiraling demand from emerging markets and the cascading effect of high oil prices have led to sharp fluctuations in polymer prices, impacting participants across the polymer spectrum - producers, processors, traders - and investors as well. The futures contracts developed by DGCX will help participants to lock-in attractive forward prices and improve margins. The contract will prove as an efficient method for project and inventory financing as well". Besides setting a global pricing standard, the DGCX futures contracts will also enable processors and convertors to offer customers fixed forward prices. Highlighting the role of DGCX in the regional derivatives market, Bernard said, "The petrochemical industry is at the core of industrial growth in the Middle East - a region also witnessing high demand for price risk management tools. As the region's premier derivatives exchange, DGCX is committed to providing a transparent pricing system. The impending plastics futures contracts holds immense benefits for polymers - one of the region's largest industries, reflecting our commitment to enriching our portfolio in order to meet the strong need for an efficient pricing mechanism". The DGCX contracts are in the final stages of development. Each grade will have three regional contracts, namely North East Asia (South Korea), South East Asia (Malaysia and Singapore) and the Middle East (Dubai). DGCX is also looking at including other regions for delivery at a later date as well as other product grades. Region-specific contracts will help futures prices to reflect the regional price differences in the physical market. Aside from price volatility, converters also face considerable pressure from low cost imports, which erodes already-low margins. Pricing of feedstock will play a key role in the future growth of this sector. Polymer prices react to anticipated capacity additions, competition, operating costs, aside from demand-supply variations
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